Why Clean Energy Fuels Fell Flat in 2013

In some investors' eyes, Clean Energy Fuels (CLNE -4.51%) was one of the most exciting prospects coming into 2013. With the promise of providing a natural-gas fueling infrastructure for the trucking industries in the U.S., Clean Energy Fuels seemed to be driving the way for the transportation sector to take advantage of the huge rise in production of low-cost natural gas from unconventional sources like shale plays. Yet despite the fact that Westport Innovations (WPRT -1.20%) and other companies were working on natural-gas fueled engines for trucks, and despite the company receiving assistance from General Electric (GE -0.60%), investors remain unconvinced that Clean Energy Fuels will be a long-term moneymaker. Let's take a closer look at what happened with Clean Energy Fuels this year and whether its stock could climb higher in 2014.

What happened to Clean Energy Fuels in 2013?
When natural gas prices fell to decade-long lows in 2012, it was inevitable that heavy users of refined oil-based fuels would look at nat-gas alternatives to take advantage of pricing disparities. Sure enough, moves like those of the San Diego and Los Angeles public-transit bus systems toward greater use of compressed natural-gas engines indicated a drive among large-scale fleets to substitute cheaper, cleaner-burning gas over more costly oil-based fuels. Even with fairly extensive up-front costs to convert existing vehicles to nat-gas fuel, the price disparities justify the cost for high-use vehicles, especially with engine designs from Westport Innovations, Cummins, and other players allowing for efficient use of natural gas.

Given the extent of the opportunity, skeptics long believed that it was only a matter of time before competitors would challenge Clean Energy Fuels and its attempt to take sole control of the nat-gas fueling industry. Early this year, Royal Dutch Shell (RDS.A) partnered with truck-stop giant TravelCenters of America (TA) to start building natural-gas fueling stations of their own. Given TravelCenters' already-existing extensive network of truck-stop locations, the beauty of the partnership is that it will only involve making upgrades to existing properties rather than having to build out new-station infrastructure from scratch. Clean Energy Fuels is doing the same thing by using the Flying J line of truck stops to house 150 LNG stations, but the competition will still hurt the company's chances at ultimate success.

Clean Energy Fuels Total Return Price data by YCharts.

Clean Energy has continued to work on its partnerships. In September, it scored a major victory in working with General Electric to establish liquefied natural gas projects across the nation. In addition, an agreement with GE Capital allowed fleet owners to finance the costs of making the transition to natural-gas-powered trucks, expecting to give operators a one-year payback based on the price differences between diesel fuel and natural gas. By getting more truck owners to take the plunge, Clean Energy Fuels is trying to lock in its customers early on.

But the greater threat to Clean Energy Fuels has been the spike in natural-gas prices in 2013. Natural gas has more than doubled from its 2012 lows, and customers remember all too well the fact that as recently as five years ago the price of the clean-burning fuel was triple current levels. After committing the up-front capital expenditures necessary to convert fleets to burn natural gas, the last thing truck owners would want to see is a rise in the price of the fuel. Locking in low prices through futures contracts and other hedging strategies is possible, but it also requires more sophistication than simply buying fuel and hoping for the best.

Stats on Clean Energy Fuels

Source: S&P Capital IQ.

What's next for Clean Energy Fuels?
Clean Energy Fuels has done a good job of building out its network of fueling stations, and it needs to continue to do so in order to get more interstate trucking fleets to think more seriously about converting to natural gas. Fleet deals like the ones it has with trash-hauler giants Waste Management and Republic Services, as well as delivery specialist United Parcel Service, can help it build more credibility going forward.

The key to Clean Energy Fuels' future is to figure out how to become profitable. At this point, offering its services as a loss leader while building up a reliable customer base makes long-term business sense. Eventually, though, the company needs to get a much larger core of dedicated consumers on board to start making money.

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